SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 2001 Commission file number: 0 - 23644
INVESTMENT TECHNOLOGY GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 95 - 2848406
- ---------------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
380 Madison Avenue, New York, New York (212) 588 - 4000
- ---------------------------------------- ------------------------------------
(Address of Principal Executive Offices) (Registrant's Telephone Number,
Including Area Code)
10017
- ---------------------------------------
(Zip Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of May 11, 2001, the Registrant had 31,721,097 shares of common stock, $.01
par value, outstanding.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
PART I. - FINANCIAL INFORMATION
Page
-------
Item 1. Financial Statements
Consolidated Statements of Financial Condition:
March 31, 2001 (unaudited) and December 31, 2000......... 4
Consolidated Statements of Income (unaudited):
Three Months Ended March 31, 2001 and 2000............... 5
Consolidated Statement of Changes in Stockholders' Equity
(unaudited):
Three Months Ended March 31, 2001........................ 6
Consolidated Statements of Cash Flows (unaudited):
Three Months Ended March 31, 2001 and 2000............... 7
Condensed Notes to Consolidated Financial Statements
(unaudited)................................................. 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 11
PART II. - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders......... 15
Item 6. Exhibits and Reports on Form 8-K............................ 15
Signatures.................................................. 16
QUANTEX IS A REGISTERED TRADEMARK OF THE INVESTMENT TECHNOLOGY GROUP, INC.
COMPANIES.
POSIT IS A REGISTERED SERVICE MARK OF THE POSIT JOINT VENTURE. SMARTSERVER, ITG
ACE, TCA AND ITG ACCESS ARE TRADEMARKS OF THE INVESTMENT TECHNOLOGY GROUP, INC.
COMPANIES.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 2 of 16
FORWARD-LOOKING STATEMENTS
In addition to the historical information contained throughout this Quarterly
Report on Form 10-Q, there are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). All statements regarding our expected future financial
position, results of operations, cash flows, dividends, financing plans,
business strategies, competitive positions, plans and objectives of management
for future operations, and concerning securities markets and economic trends are
forward-looking statements. Although we believe our expectations reflected in
such forward-looking statements are based on reasonable assumptions, there can
be no assurance that such expectations will prove to have been correct.
Important factors that could cause actual results to differ materially from the
expectations reflected in the forward-looking statements herein include, among
others, the actions of both current and potential new competitors, rapid changes
in technology, fluctuations in market trading volumes, market volatility,
changes in the regulatory environment, risk of errors or malfunctions in our
systems or technology, cash flows into or redemptions from equity funds, effects
of inflation, customer trading patterns, as well as general economic and
business conditions, securities, credit and financial market conditions, and
adverse changes or volatility in interest rates.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 3 of 16
PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
MARCH 31, DECEMBER 31,
2001 2000
--------- ------------
(UNAUDITED)
ASSETS
Cash and cash equivalents .................................. $ 168,505 $ 135,533
Securities owned, at fair value ............................ 69,026 51,761
Receivables from brokers, dealers and other, net ........... 27,216 23,892
Investments in limited partnerships ........................ 17,553 16,702
Premises and equipment ..................................... 24,741 24,330
Capitalized software ....................................... 4,370 4,544
Goodwill ................................................... 4,146 4,408
Deferred taxes ............................................. 4,602 4,499
Other assets ............................................... 17,945 16,043
--------- ---------
Total assets ............................................... $ 338,104 $ 281,712
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses ...................... $ 51,634 $ 39,510
Payable to brokers, dealers and other ...................... 9,256 7,303
Software royalties payable ................................. 5,546 4,151
Securities sold, not yet purchased, at fair value .......... 19,591 11,402
Income taxes payable ....................................... 19,119 8,930
--------- ---------
Total liabilities .......................................... 105,146 71,296
--------- ---------
STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.01; shares authorized:
1,000,000; shares issued: none ....................... -- --
Common stock, par value $0.01; shares authorized:
100,000,000; shares issued: 34,109,823 and 34,096,514
at March 31, 2001 and December 31, 2000 .............. 341 341
Additional paid-in capital .............................. 139,060 138,297
Retained earnings ....................................... 160,369 139,320
Common stock held in treasury, at cost; shares: 2,429,156
at March 31, 2001 and 2,479,568 at
December 31, 2000 .................................... (65,820) (67,186)
Accumulated other comprehensive loss:
Currency translation adjustment ...................... (992) (356)
--------- ---------
Total stockholders' equity .............................. 232,958 210,416
--------- ---------
Total liabilities and stockholders' equity ................. $ 338,104 $ 281,712
========= =========
SEE ACCOMPANYING UNAUDITED CONDENSED NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 4 of 16
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
----------------------
MARCH 31, MARCH 31,
2001 2000
-------- --------
REVENUES:
Commissions:
POSIT ............................................... $ 43,209 $ 38,119
Electronic trading desk ............................. 20,987 17,367
Client site ......................................... 23,235 18,576
Other ................................................. 4,308 1,550
-------- --------
Total revenues .................................... 91,739 75,612
-------- --------
EXPENSES:
Compensation and employee benefits .................... 23,833 18,440
Transaction processing ................................ 12,955 10,709
Software royalties .................................... 5,619 4,988
Occupancy and equipment ............................... 4,680 3,896
Telecommunications and data processing services ....... 3,775 3,033
Net (gain) loss on long-term investments .............. (1,028) 782
Other general and administrative ...................... 6,593 5,158
-------- --------
Total expenses .................................... 56,427 47,006
-------- --------
Income before income tax expense ........................... 35,312 28,606
Income tax expense ......................................... 14,263 12,702
-------- --------
Net income ................................................. $ 21,049 $ 15,904
======== ========
Basic net earnings per share of common stock ............... $ 0.67 $ 0.52
======== ========
Diluted net earnings per share of common stock ............. $ 0.65 $ 0.51
======== ========
Basic weighted average shares outstanding .................. 31,651 30,495
======== ========
Diluted weighted average shares and common stock equivalents
outstanding ........................................... 32,146 31,244
======== ========
SEE ACCOMPANYING UNAUDITED CONDENSED NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 5 of 16
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2001
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Common Accumulated
Additional Stock Other Total
Preferred Common Paid-in Retained Held in Comprehensive Stockholders'
Stock Stock Capital Earnings Treasury Loss Equity
---------- --------- --------- ---------- --------- ------------- -------------
Balance at December 31, 2000 .............. $ -- $ 341 $ 138,297 $ 139,320 $ (67,186) $ (356) $ 210,416
Issuance of common stock in connection
with the 1994 stock option and long-term
incentive plan (50,412 shares) ......... -- -- 206 -- 1,366 -- 1,572
Issuance of common stock in connection
with the employee stock purchase plan
(13,309 shares) ........................ -- -- 557 -- -- -- 557
Comprehensive income:
Net income ............................. -- -- -- 21,049 -- -- 21,049
Other comprehensive income:
Currency translation adjustment .... -- -- -- -- -- (636) (636)
---------
Comprehensive income ...................... -- -- -- -- -- -- 20,413
---------- --------- --------- --------- --------- --------- ---------
Balance at March 31, 2001 ................. $ -- $ 341 $ 139,060 $ 160,369 $ (65,820) $ (992) $ 232,958
========== ========= ========= ========= ========= ========= =========
SEE ACCOMPANYING UNAUDITED CONDENSED NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 6 of 16
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED
------------------------------
MARCH 31, 2001 MARCH 31, 2000
------------------------------
Cash flows from operating activities:
Net income ............................................................ $ 21,049 $ 15,904
Adjustments to reconcile net income to net cash provided by operating
activities:
Deferred income tax expense (benefit) ............................ (104) 30
Depreciation and amortization .................................... 3,735 2,293
Undistributed net (income) loss on long-term investments ......... (1,028) 782
Provision for doubtful receivables ............................... 310 80
Increase in operating assets:
Securities owned, at fair value ................................... (17,265) (4,382)
Receivables from brokers, dealers and other, net .................. (3,633) (12,155)
Investments in limited partnerships ............................... (851) (600)
Other assets ...................................................... (794) (566)
Increase in operating liabilities:
Accounts payable and accrued expenses ............................. 12,124 9,787
Payable to brokers, dealers and other ............................. 1,953 7,085
Software royalties payable ........................................ 1,395 20
Securities sold, not yet purchased, at fair value ................. 8,189 2,420
Income taxes payable .............................................. 10,189 1,800
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES ........................ 35,269 22,498
--------- ---------
Cash flows from investing activities:
Purchase of premises and equipment ................................ (2,986) (3,278)
Purchase of investment in limited partnership ..................... -- (750)
Investment in joint venture ....................................... -- (1,529)
Capitalization of software development costs ...................... (804) (471)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES ............................ (3,790) (6,028)
--------- ---------
Cash flows from financing activities:
Purchase of common stock for treasury ............................. -- (1,763)
Issuance of common stock from treasury in connection with employee
stock unit award plan .......................................... 1,366 --
Issuance of common stock in connection with employee stock option
plan, including related tax benefit ............................ 763 23,088
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES ........................ 2,129 21,325
--------- ---------
Effect of foreign currency translation on cash and cash equivalents (636) --
Net increase in cash and cash equivalents ........................ 32,972 37,795
Cash and cash equivalents - beginning of period ....................... 135,533 53,081
--------- ---------
Cash and cash equivalents - end of period ............................. $ 168,505 $ 90,876
========= =========
Supplemental cash flow information:
Interest paid ..................................................... $ 2 $ 41
========= =========
Income taxes paid ................................................. $ 3,400 $ 128
========= =========
SEE ACCOMPANYING UNAUDITED CONDENSED NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 7 of 16
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
ORGANIZATION AND BASIS OF PRESENTATION
The Consolidated Financial Statements include the accounts of Investment
Technology Group, Inc. and its wholly-owned subsidiaries ("ITG"), which
principally include: (1) ITG Inc. and AlterNet Securities, Inc., U.S.
broker-dealers in equity securities, (2) Investment Technology Group
International Limited, which, at March 31, 2001, was a 50% partner in the ITG
Europe joint venture, (3) ITG Australia Limited, an institutional broker-dealer
in Australia, (4) ITG Canada Corp., an institutional broker-dealer in Canada,
(5) ITG Software Inc., our intangible property management subsidiary in
California, (6) ITG Software Solutions, Inc., our software development and
maintenance subsidiary in California and (7) Inference Group LLC, an internal
asset management subsidiary. We provide equity trading services and transaction
research to institutional investors and brokers in the United States ("U.S."),
Canada, Australia and Europe.
We are a leading financial technology firm that provides a fully integrated
set of value-added electronic equity analysis and trade execution tools. We
provide services that help our clients optimize their portfolio construction and
trading strategies, efficiently access liquidity in multiple markets and achieve
superior, low-cost trade execution. Our clients are major institutional
investors and broker-dealers. Our products include: POSIT, the world's largest
electronic equity matching system; QuantEX, a Unix-based decision-support, trade
management and order routing system; ITG Platform, a PC-based order routing and
trade management system; Electronic Trading Desk, an agency-only trading desk
offering clients the ability to efficiently access multiple sources of
liquidity; ACE and TCA, a set of pre- and post-trade tools for systematically
estimating and measuring transaction costs; SmartServers, which offer
server-based implementation of trading strategies; ITG/OPT, a computer-based
equity portfolio selection system; ITG Access, a browser-based order routing
tool; and research, development, sales and consulting services to clients.
ACQUISITIONS
In the fourth quarter of 1998, we entered into a 50/50 joint venture with
Societe Generale, and founded Investment Technology Group (Europe) Limited. On
November 18, 1998, ITG Europe launched a new agency brokerage operation that
included the operation of a European version of the POSIT system. On January 12,
2001 we signed an agreement with Societe Generale to acquire their entire
interest in ITG Europe for $18.5 million. This transaction was closed on May 2,
2001.
CASH AND CASH EQUIVALENTS
We have defined cash and cash equivalents as highly liquid investments, with
original maturities of less than ninety days, which are part of our cash
management activities.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Substantially all of our financial instruments are carried at fair value or
amounts approximating fair value. Cash and cash equivalents, securities owned
and certain receivables, are carried at fair value or contracted amounts which
approximate fair value due to the short period to maturity and repricing
characteristics. Similarly, liabilities are carried at amounts approximating
fair value. Securities sold, not yet purchased are valued at quoted market
prices.
USE OF ESTIMATES
The preparation of the financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses and the disclosure of contingent
assets, liabilities, revenues and expenses. Actual results could differ from
those estimates.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 8 of 16
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year's amounts to
conform to the current year's presentation.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at March 31, 2001 and December 31, 2000
consisted of the following:
MARCH 31, DECEMBER 31,
2001 2000
------- -------
(DOLLARS IN THOUSANDS)
Accounts payable and accrued expenses $13,650 $10,664
Accrued compensation ................ 9,345 850
Deferred compensation ............... 14,472 14,733
Accrued soft dollars payable ........ 11,568 10,283
Accrued rent expense ................ 2,599 2,980
------- -------
Total ............................... $51,634 $39,510
======= =======
EARNINGS PER SHARE
Net earnings per share of common stock, is based upon an adjusted weighted
average number of shares of common stock outstanding. The diluted weighted
average number of outstanding shares for the three months ended March 31, 2001
and March 31, 2000 was 32.1 million and 31.2 million, respectively.
The following is a reconciliation of the basic and diluted earnings per share
computations for the three months ended March 31, 2001 and March 31, 2000.
MARCH 31, MARCH 31,
2001 2000
------- -------
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
Net income ...................................................... $21,049 $15,904
======= =======
Shares of common stock and common stock equivalents:
Average number of common shares used in basic computation .. 31,651 30,495
Effect of dilutive securities - options .................... 495 749
------- -------
Average number of common shares used in diluted computation 32,146 31,244
======= =======
Earnings per share:
Basic ...................................................... $ 0.67 $ 0.52
======= =======
Diluted .................................................... $ 0.65 $ 0.51
======= =======
NET CAPITAL REQUIREMENT
ITG Inc. and AlterNet Securities, Inc. are subject to the Uniform Net
Capital Rule (Rule 15c3-1) under the Securities Exchange Act of 1934, which
requires the maintenance of minimum net capital. ITG Inc. has elected to use the
alternative method permitted by Rule 15c3-1, which requires that ITG Inc.
maintain minimum net capital equal to the greater of $250,000 or 2% of aggregate
debit balances arising from customer transactions, as defined. AlterNet
Securities, Inc. has elected to use the basic method permitted by Rule 15c3-1,
which requires that AlterNet Securities, Inc. maintain minimum net capital, as
defined, equal to the greater of $100,000 or 6 2/3% of aggregate indebtedness.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 9 of 16
At March 31, 2001, ITG Inc. and AlterNet Securities, Inc. had net capital
of $101.6 million and $0.9 million, respectively, of which $101.3 million and
$0.8 million, respectively, was in excess of required net capital.
In addition, ITG Canada Corp. and ITG Australia Limited had regulatory
capital in excess of the minimum requirement of approximately $7.5 million and
$0.5 million, respectively.
CONTINGENCIES
In 1998, we received a "30-day letter" proposing certain adjustments
which, if sustained, would result in a tax deficiency of approximately $9.6
million plus interest. The adjustments proposed relate to (i) the disallowance
of deductions taken in connection with the termination of certain compensation
plans at the time of our initial public offering in 1994 and (ii) the
disallowance of tax credits taken in connection with certain research and
development expenditures. On September 18, 2000, we entered into a closing
agreement with the IRS with respect to the compensation plan deductions, whereby
the IRS agreed that the deductions taken were allowable deductions. This
agreement eliminates approximately $7.6 million of the $9.6 million potential
tax deficiency raised by the IRS in 1998. We are continuing to pursue the
resolution of the research and development tax credit issue and we believe that
the ultimate resolution will not be material to the financial position of the
Company.
We may continue to be liable for certain liabilities of our former parent,
Jefferies Group, despite the express assignment of such liabilities to, and the
express assumption of such liabilities by, a wholly owned subsidiary of
Jefferies Group ("New Jefferies"). Pursuant to the distribution agreement,
benefits agreement and tax sharing and indemnification agreement executed in
connection with the spin-off, New Jefferies will be obligated to indemnify us
for liabilities related to our former parent and its subsidiaries, but not for
our liabilities. Under those agreements, we will be obligated to indemnify New
Jefferies for liabilities related to our Company. Our ability to recover any
costs under such indemnity will depend upon the future financial strength of New
Jefferies.
At both March 31, 2001 and December 31, 2000, we had outstanding capital
contribution commitments to a limited partnership in the amount of $300,000.
DIVIDENDS
Any future payments of dividends will be at the discretion of our Board of
Directors and will depend on our financial condition, results of operations,
capital requirements and other factors deemed relevant.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 10 of 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
REVENUES:
We generate substantially all of our revenues from the following three
products and services, each contributing to our single line of business:
o POSIT: a confidential electronic stock crossing system;
o Electronic Trading Desk: an agency-only trading desk;
o Client Site Front End Software;
o QuantEX: a Unix-based front-end software system providing market
analysis, trade management and electronic connectivity to POSIT and
multiple trade execution destinations;
o ITG Platform: a PC-based front-end software system providing market
analysis, trade management and electronic connectivity to POSIT and
multiple trade execution destinations.
Revenues primarily consist of commissions from customers' use of our trade
execution and analytical services. Because these commissions are paid on a
per-transaction basis, revenues fluctuate from period to period depending on the
volume of securities traded through our services. We record as POSIT revenue any
order that is executed on the POSIT system regardless of the manner in which the
order was submitted to POSIT. ITG collects a commission from each side of a
trade matched on POSIT. We record as Electronic Trading Desk revenue any order
that is handled by our trading desk personnel and executed at any trade
execution destination other than POSIT. We record as Client site revenue any
order that is sent by our clients, through ITG's Client site systems but without
assistance from the Electronic Trading Desk, to any third party trade execution
destination. Other revenue includes (a) interest income/expense, (b) market
gains/losses and financing costs resulting from temporary positions in
securities assumed in the normal course of our agency trading business, (c) fees
for development and other services provided to our unconsolidated international
affiliates and (d) realized gains and losses in connection with our cash
management activities.
EXPENSES:
Expenses consist of compensation and employee benefits, transaction
processing, software royalties, occupancy and equipment, telecommunications and
data processing services, net gain/loss on long-term investments, and other
general and administrative expenses. Compensation and employee benefits expenses
include base salaries, bonuses, employment agency fees, part-time employee
compensation, fringe benefits, including employer contributions for medical
insurance, life insurance, retirement plans and payroll taxes, partially offset
by capitalized software. Transaction processing expenses consist of floor
brokerage and clearing fees and connection fees for use of certain third party
execution services. Software royalties are payments to our POSIT joint venture
partner, BARRA. Occupancy and equipment expenses include rent, depreciation,
amortization of leasehold improvements, maintenance, utilities, occupancy taxes
and property insurance. Telecommunications and data processing services include
costs for computer hardware, office automation and workstations, data center
equipment, market data services and voice, data, telex and network
communications. Net (gain) loss on long-term investments includes equity
gain/loss on joint venture investments. Other general and administrative
expenses include amortization of software and goodwill, legal, audit, tax,
consulting and promotional expenses.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 11 of 16
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE
MONTHS ENDED MARCH 31, 2000
The table below sets forth, certain items in the statement of operations
expressed as a percentage of revenues for the periods indicated:
THREE MONTHS ENDED
----------------------
MARCH 31, MARCH 31,
----------------------
2001 2000
------- -------
Revenues: ..........................................
Commissions
POSIT ..................................... 47.1 50.4
Electronic trading desk ................... 22.9 23.0
Client site ............................... 25.3 24.6
Other ......................................... 4.7 2.0
------- -------
Total revenues............................. 100% 100%
------- -------
Expenses:
Compensation and employee benefits ............ 26.0 24.4
Transaction processing ........................ 14.1 14.2
Software royalties ............................ 6.1 6.6
Occupancy and equipment ....................... 5.1 5.2
Telecommunications and data processing services 4.1 4.0
Net (gain) loss on long-term investments ...... (1.1) 1.0
Other general and administrative .............. 7.1 6.8
------- -------
Total expenses ............................ 61.5 62.2
------- -------
Income before income tax expense ................... 38.5 37.8
Income tax expense ................................. 15.5 16.8
------- -------
Net income ......................................... 23.0 21.0
======= =======
EARNINGS PER SHARE:
Basic net earnings per share for the three months ended March 31, 2001
("First Quarter 2001") increased $0.15, or 29%, to $0.67 from $0.52 for the
three months ended March 31, 2000 ("First Quarter 2000"). Diluted net earnings
per share increased $0.14, or 27%, to $0.65 from $0.51. These results include
the effect of a one-time gain that approximated $0.06 per diluted share.
Excluding this non-recurring gain, diluted net earnings per share increased
$0.08, or 16%.
REVENUES:
Total revenues increased $16.1 million, or 21%, from $75.6 million to
$91.7 million. There were 63 trading days in First Quarter 2000 and 62 trading
days in First Quarter 2001. Revenues per trading day increased by $280,000, or
23%, from $1,200,000 to $1,480,000. Revenues per employee decreased $40,000, or
17%, from $230,000 to $190,000.
The number of shares crossed on the POSIT system per day increased 7.3
million, or 24%, from 30.1 million in First Quarter 2000 to 37.4 million in
First Quarter 2001. The number of shares crossed on the POSIT system increased
0.4 billion, or 21%, from 1.9 billion in First Quarter 2000 to 2.3 billion in
First Quarter 2001. Client site revenues increased 25% resulting from an
increase in share volume in First Quarter 2001 partially offset by a decrease in
average Client site revenue per share. The decrease in average Client site
revenue per share reflects growth in our lower priced routing only services
which yielded higher margins as we have no transaction processing costs
associated with this business. Electronic Trading Desk revenues increased 21%
due to both an increase in U.S. share volume in First Quarter 2001 and revenues
from Australian and Canadian entities for which no revenues were reported in
First Quarter 2000. Other revenues increased primarily due to increases in
investment income arising from larger average interest-earning balances as well
as the performance of our wholly-owned internal asset management subsidiary.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 12 of 16
EXPENSES:
Total expenses excluding income tax expense for First Quarter 2001
increased $9.4 million, or 20%, from $47.0 million in First Quarter 2000 to
$56.4 million.
FIRST QUARTER ENDED
MARCH 31,
---------
(DOLLARS IN THOUSANDS)
----------------------
2001 2000 CHANGE % CHANGE
---- ---- ------ --------
Compensation and employee benefits........................ $23,833 $18,440 5,393 29.2
Transaction processing.................................... 12,955 10,709 2,246 21.0
Software royalties........................................ 5,619 4,988 631 12.6
Occupancy and equipment................................... 4,680 3,896 784 20.1
Telecommunications and data processing services........... 3,775 3,033 742 24.4
Net (gain) loss on long-term investments ................. (1,028) 782 (1,810) (231.5)
Other general and administrative.......................... 6,593 5,158 1,435 27.8
Income tax expense........................................ 14,263 12,702 1,561 12.3
COMPENSATION AND EMPLOYEE BENEFITS: Salaries, bonuses and related employee
benefits increased primarily due to growth in our employee base of 154 employees
or 47% from 328 to 482 (which includes the reporting of employees in ITG Canada
Corp. and ITG Australia Limited) and payment of additional compensation
necessary to attract and retain quality personnel. Approximately 39% of the
increase in employees were staffed in technology, product development and
production infrastructure and 36% of the increase related to the addition of
employees in Canada and Australia. Average compensation and employee benefits
expenses per (average) headcount decreased $5,500, or 10%, from $57,000 to
$51,500.
TRANSACTION PROCESSING: Transaction processing as a percentage of revenues
decreased from 14.2% to 14.1% of revenues. ECN costs increased $1.7 million from
$2.1 million in First Quarter 2000 to $3.8 million in First Quarter 2001.
Despite share volume growth, collective U.S. clearing and execution costs
decreased due to both lower unit costs and increases in average ticket size.
These cost savings were offset by transaction costs incurred by our Australian
and Canadian operations that were not present in First Quarter 2000.
SOFTWARE ROYALTIES: Because software royalties are contractually fixed at
13% of U.S. POSIT revenues, the increase is wholly attributable to an increase
in POSIT revenues.
OCCUPANCY AND EQUIPMENT: The increase in headcount and infrastructure
enhancements resulted in additional equipment purchases and the associated
depreciation and maintenance expenses. In addition, rent expense increased due
to the expansion of our research and development facility in Culver City,
California, as well as the opening of additional offices during 2000 in Toronto,
Canada, Waltham, Massachusetts and newly acquired Sydney and Melbourne,
Australia offices.
TELECOMMUNICATIONS AND DATA PROCESSING SERVICES: Telecommunications and
data processing services as a percentage of revenues increased slightly from
4.0% to 4.1% due to the inclusion of costs incurred by ITG Australia Limited and
ITG Canada Corp., which were not present in First Quarter 2000.
NET (GAIN) LOSS ON LONG-TERM INVESTMENTS: In First Quarter 2001 we,
through our ITG Europe venture recognized a one time gain of $1.9 million
relating to the sale of 100,000 shares of stock that ITG Europe held in the
London Stock Exchange ("LSE"), which were received at the time of the LSE
demutualization in the year 2000. The reported gain of $1.0 million was net of
our $0.9 million share of ITG Europe's operating loss for First Quarter 2001. In
First Quarter 2000 we had recognized a loss on long-term investments primarily
resulting from our ITG Europe venture.
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OTHER GENERAL AND ADMINISTRATIVE: The increase in other general and
administrative expenses reflects an increase in consulting fees, increased
spending on business development and costs incurred from ITG Australia Limited
and ITG Canada Corp., which were not present in First Quarter 2000. In addition,
expenses relating to software amortization for certain products that were
released in 2000 contributed to the higher expense in First Quarter 2001.
INCOME TAX EXPENSE
The decrease in the effective tax rate from 44.4% in First Quarter 2000 to
40.4% in First Quarter 2001 was due to decreases in state and local income taxes
and income from our ITG Europe venture primarily as a result of the recognition
of a $1.9 million gain on the sale of the LSE shares that was offset against net
operating loss carry forwards and was therefore not subject to tax.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity and capital resource requirements result from our working
capital needs, primarily consisting of compensation and benefits, transaction
processing fees and software royalty fees. Historically, cash from operations
has met all working capital requirements. A substantial portion of our assets
are liquid, consisting of cash and cash equivalents or assets readily
convertible into cash.
We believe that our cash flow from operations and existing cash balances
will be sufficient to meet our cash requirements. We generally invest our excess
cash in money market funds and other short-term investments that generally
mature within 90 days or less. Additionally, securities owned at fair value
include highly liquid, variable rate municipal securities, auction rate
preferred stock, common stock and convertible debt securities. At March 31,
2001, such cash equivalents and securities owned at fair value amounted to
$237.5 million and net receivables from brokers, dealers and other, of $20.5
million were due within 30 days.
We also invest a portion of our excess cash balances in cash enhanced
strategies, which we believe should yield higher returns without any significant
effect on risk. As of March 31, 2001, we had investments in limited partnerships
investing in marketable securities, a hedged convertible managed account, and a
venture capital fund amounting to $31.9 million in the aggregate. The limited
partnerships employ either a hedged convertible strategy or a long/short
strategy to capitalize on short term price movements. Our managed account is
employing a hedged convertible strategy. We classify the securities under our
managed account within securities owned, at fair value and securities sold, not
yet purchased, at fair value.
Historically, all regulatory capital needs of ITG have been provided by
cash from operations. We believe that cash flows from operations will provide
ITG with sufficient regulatory capital. Although we believe that the combination
of our existing net regulatory capital and operating cash flows will be
sufficient to meet regulatory capital requirements, a shortfall in net
regulatory capital would have a material adverse effect on us.
ACQUISITIONS
In the fourth quarter of 1998, we entered into a 50/50 joint venture
with Societe Generale, and founded Investment Technology Group (Europe) Limited.
On November 18, 1998, ITG Europe launched a new agency brokerage operation that
included the operation of a European version of the POSIT system. On January 12,
2001 we signed an agreement with Societe Generale to acquire their entire
interest in ITG Europe for $18.5 million. This transaction was closed on May 2,
2001.
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PART II. - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INVESTMENT TECHNOLOGY GROUP, INC.
---------------------------------
(Registrant)
Date: May 11, 2001 By: /s/ Howard C. Naphtali
---------------------- --------------------------
Howard C. Naphtali
Chief Financial Officer and
Duly Authorized Signatory of
Registrant
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